Matthew E. Souther and Adam S. Yore are Assistant Professors in Finance at the Robert J. Trulaske, Sr. College of Business a University of Missouri. The following post is based on a recent paper by Professors Souther and Yore.

In the paper, Racial and Gender Inequality in the Boardroom, we analyze the individual compensation levels of S&P 1,500 directors and find that minority and female (“diverse”) directors earn systematically lower compensation than their peers serving within the same board, despite having higher qualifications on average. The lower compensation is largely a function of board responsibilities, but also reflects differences in pay not attributable board leadership or service on the primary committees. Although diverse directors are more likely to serve on certain committees, they are less likely to serve in key leadership positions associated with higher levels of pay such as committee chairs, Lead Director, or Chairman of the Board. Additionally, they are less likely to earn additional income beyond the formulaic components of director compensation.

To assess the labor market value of diverse directors, we leverage the change in reporting requirements for director compensation. Prior to 2006, firms were not required to detail the remuneration of individual directors, but rather the overall compensation policy of the board. Thus, to this date, conclusions about the value of board diversity in the director labor market could only be observed at the firm level. However, with the adoption of SEC Rule 33-8732A on November 7, 2006, corporations must now disclose individual director compensation in a manner similar to executive compensation in the director compensation table in accordance with FAS 123R. As a result, we are able to directly attribute the monetary value boards award for the service of diverse directors.

Using a large sample of 66,855 director-firm-year observations serving at 1,828 unique firms from 2006 to 2013, we find that large and highly publicly visible firms are more likely to appoint diverse directors and that diverse directors comprise a greater proportion of the board at these sorts of firms. Shareholders also appear to value the service of diverse directors and we use their “voice” in director elections as a proxy for the perceived value that investors place on their service. We find that diverse directors are associated with significantly higher vote totals than their counterparts, providing evidence that shareholders value the contributions of diverse directors.

A different story emerges when it comes to how the board’s compensation committee values the participation of diverse directors. Highly visible firms award more lucrative pay packages, on average, and diverse directors enjoy greater representation at these firms. However, we find that female and minority directors experience systematically negative within-board variation in their total compensation. That is, while they tend to be appointed to boards which often pay more, they earn less than their peers within those same boards. We note that our results hold while controlling for the commonly employed measures of director quality used in the literature such as education, board experience, and professional background. By these measures, we find that diverse directors are more qualified than their non-diverse peers, on average. We acknowledge that other unobservable qualifications that stratify by female and minority status could potentially explain our results. However, such characteristics would also have to be negatively correlated with shareholder votes.

Director compensation is largely a function of the annual retainer, meeting fees, bonuses for serving on a committee, and, in particular, chairing one of the principal board committees (i.e., audit, compensation, nominating, and governance). The entire board is entitled to the base retainer and meeting fees, along with additional fees for committee responsibilities. Much of the difference in pay observed is accounted for by a director’s additional committee responsibilities, with certain influential committees and chair positions being worth more than others are. Directors also have opportunities to earn supplemental compensation for special assignments such as consulting or perquisites and these “other” fees also play a role in determining total pay. Prior literature suggests that variation in these responsibilities is largely a function of the board’s perception of the director’s qualifications and that the pay for this additional workload can be material.

We do find evidence that diverse directors are more likely to be appointed to certain principal board committees, and indeed committee and chair service is a positive determinant of director pay. Female and minority directors are more likely to be appointed to the standing audit, nominating, and governance committees. Curiously, they are less likely to be appointed to the one committee of particular interest in this study, the compensation committee. However, we find that diverse directors, on average, are less likely to be appointed to positions of leadership on the board. That is, they are 1 to 3 percentage points less likely to serve as either the Chairman of the Board or Lead Director and 4 percentage points less likely to serve as a chair of a standing committee. Given a typical board size of nine and a naïve probability of chair selection for a given committee at 1/n, the economic effect is meaningful. Again, this result is largely driven by female and minority board members being significantly less likely to serve as the chair of the two power committees: audit and compensation. Notably, while female directors are tapped as chairs for some committees, minority directors are significantly less likely to serve in any major leadership position on the board. Furthermore, diverse directors are significantly less likely to participate in assignments that entitle them to “other” compensation and earn 6.2% less than their peers in this category. These results suggest that some of the pay gaps documented for diverse directors are the result of differences in opportunities to earn additional pay beyond the standard retainer.

Cognizant of the differences in opportunities effect noted above, we examine a set of directors without these confounding influences on pay by examining a homogenous group that do not serve on the board’s standing committees. For this smaller pool of directors, we find that the pay gaps empirically estimated become stronger. That is, diverse director pay is 9% lower among the set of directors whose only function on the board is that of an outside director. Finally, we find that female and minority participation on the compensation committee significantly reduces the within-board pay disparity that we observe.

Our results raise important questions about inequality among corporate leaders and lend justification to several recent public concerns on these issues. While most concerns raised by advocates have focused primarily on board composition, we point to evidence of inequality even after these directors have been elected to the board.